Free Market vs The State

Governments commonly provide financial support mechanisms for energy development to align the market with strategic goals, especially with regards to decarbonisation. How does the free market vs state support debate shake out, and does it boil down to perceptions of the climate change crisis? Chris Lo reports

IN AN ESSAY APPEARING IN THE MARCH/APRIL 2018 ISSUE OF FOREIGN AFFAIRS, COUNCIL ON FOREIGN RELATIONS DIRECTOR OF ENERGY SECURITY AND CLIMATE CHANGE AMY MYERS JAFFE ISSUED A WARNING CALL TO THE US.

Jaffe’s article, along with the editorial she wrote for the Houston Chronicle, argued that the US is in danger being left behind as it enjoys the benefits of its domestic oil and gas production boom, while its chief international rival China transitions powerfully towards renewable energy sources and technologies, supported by billions in direct government funding, tax credits and other subsidies.

Without a proactive government willing to “devise policies to help innovation and promote the adoption of technologies that can rival Chinese products”, Jaffe maintained, the US risks getting mired in the fossil fuel energies of the past while China sets the terms of the global clean energy future.

“The United States risks frittering away its dominance of the global energy market,” Jaffe wrote. “But with strong leadership and a long-term commitment, it can secure its energy future for decades to come.”

/ The Chinese Government represents a particularly radical form of state intervention /

Central planning vs free market

/ The Chinese Government represents a particularly radical form of state intervention /

Jaffe’s conclusions are hardly unorthodox, and echo widespread concerns surrounding the US’s planned withdrawal from the Paris climate change agreement and its potential impact on the global energy transition. Nonetheless, her articles drew a swift counterargument from Robert L Bradley, founder and CEO of free-market think tank the Institute for Energy Research. Bradley’s response criticised both Jaffe’s views on China’s renewables pivot and the whole concept of government policy involvement in the energy markets.

“Unfortunately, too many intellectual elitists believe that government can define and direct energy policy in place of self-interested, energy-reliant consumers – 1.4 billion in China, 300 million in the US, and billions elsewhere,” Bradley wrote. “China should recast its energy policy for its citizens, and the US should reject central planning schemes at home and abroad.”

The Chinese Government represents a particularly radical form of state intervention in market processes, and the impacts of the heavy subsidisation of its solar panel manufacturing industry, for instance, have been well-discussed.

But countries in Europe, North America and elsewhere have commonly seen state intervention in the energy sector in the form of subsidies, incentives and other mechanisms to help align the market with strategic goals, especially in the development of clean energy technologies, as governments the world over work to meet their decarbonisation commitments.

With Bradley and other libertarian-minded commentators questioning the legitimacy of state subsidies of any stripe, and in the process the mainstream energy policy orthodoxy at large, it’s worth delving into how the free market versus state intervention debate plays out.

The free marketeer’s view

/ These are energies that are not being naturally chosen in the market /

Speaking on the phone a few weeks after his response to the Foreign Affairs essay, Bradley doesn’t mince words on the perspective of Jaffe, who did not respond to requests for comment.

“Amy Myers Jaffe is a critic of consumers, the market, business as usual, and so she sees a centrally planned economy doing what she thinks should be done, and she, I think very naïvely, thinks that somehow they know what to do and that central planning works,” he says. “I think she’s wrong on a holistic level.”

/ These are energies that are not being naturally chosen in the market /

In the broadest terms, Bradley objects to central planning based on the ‘knowledge problem’, a principle first defined by Austrian-British economist and social theorist FA Hayek.

“The free marketeers won this argument decades ago, about how knowledge of efficiency in a society doesn’t exist in whole form for a central planner to get,” Bradley says. “It only exists in a very decentralised way, with every consumer and every entrepreneur just working off prices and profits.”

On the topic of energy, Bradley extends this objection to Chinese-style central planning to the subsidies that are commonly awarded to clean energy technologies – as well as fossil fuel industries – to incentivise development and align markets strategically. On renewables, he believes that the technical and economic issues of technologies such as wind power and grid-connected solar mean they don’t stand up to the scrutiny of the market and are being propped up by ideologically driven government policy.

“These are energies that are not being naturally chosen in the market,” he says. “So whenever the subsidies go away, the industry turns into a bust.”

Fossil fuels, in his view, are the market’s energy source of choice. In fact, Bradley believes that the economics of renewables and fossil fuels have been sown up since 1865, when British economist WS Jevons asserted the dominance of coal over renewable sources such as hydrogen due to the favourable energy density of fossil fuels – while also, it must be noted, warning of the implications of running out of coal).

“In 1865, [Jevons] understood very clearly the energy density question. He understood why there was no turning back from mineral-dense energies to very dilute wind and photovoltaics – they’re very dilute, so you need huge infrastructure to turn these into useable energies. It’s very uneconomic and fossil fuels come with their own storage – wind and solar doesn’t. The basic question of energy density is not going away, and really nuclear and uranium is really your only alternative, but then fossil fuels have made nuclear totally uneconomic. I think we could still be very young in the fossil fuel era.”

The case for state intervention

/ The government has to make decisions about which technologies are going to deliver /

Bradley’s broadly business-as-usual view goes very much against the consensus on energy development, which generally sees some form of state support and market guidance as inevitable, especially in light of highly challenging international agreements on carbon reduction. By lumping state-level subsidies and support mechanisms of democracies that otherwise cleave to market-driven processes in with the radical interventionist model of communist China, it could certainly be argued that Bradley and his ilk are setting up a straw man to lend weight to their aversion to any interference with the free market.

/ The government has to make decisions about which technologies are going to deliver /

“‘State intervention’ is quite a politically controversial term and it could be interpreted in a variety of different ideological ways,” says Greenpeace UK’s head of politics Rebecca Newsom. “I want to make very clear that Greenpeace is not taking an ideological view around this principle of state intervention or not, and whether or not, ultimately, the clean transition that we need to see is driven to a greater or lesser extent by the state or the private sector. We’re more interested in results.”

Newsom sees a necessity for state-level involvement in the creation of a cleaner and more flexible energy system, while acknowledging that its role must be limited. “The purpose of the subsidy, for any type of technology, is to create space for that technology to develop, to prove itself, to learn from mistakes in the early stages, to become more established and mature, and for costs to come down,” she says. “And as that process happens, the subsidies need to be withdrawn.”

Neither should support be offered blindly, Newsom argues, pointing to Greenpeace’s position on the UK’s pending nuclear projects in Wylfa, Sizewell and Moorside. “In this scenario, we would say this isn’t giving good value for money, and the principle for state investment or support or intervention in this scenario for nuclear does not stack up,” she says. “Ultimately, the government has to make decisions about which technologies are going to deliver the bulk of our low-carbon power in the future.”

In Europe and elsewhere, early-stage subsidy support for renewable energy sources has driven competition and helped reduce costs massively, as is evidenced by the surge of record-low strike prices for offshore wind in northern Europe.

Nevertheless, subsidies have added to consumer energy bills; in 2016 the UK National Audit Office announced that household energy bills by 2020 were on track to rise £17 higher than previously thought due to the extensive deployment of wind farms and solar panels. As lower income households are likely to spend a higher proportion of their budgets on energy, this fuels the argument that the global clean energy transition is happening on the backs of the poor, in what Bradley describes as “perverse wealth transfer”.

“I would say it comes down to the kind of policy the government chooses to use to ensure that the distributional effects of the transition towards cleaner energy are not felt most by the poorest,” Newsom says. “There are ways around that – if poorer households were given the support to insulate their homes, that could in turn help reduce their energy bills significantly.”

/ Climate change is spinning out of control and urgent action is required /

Climate change: a question of urgency

/ Climate change is spinning out of control and urgent action is required /

In many ways, the whole state vs free market debate is skewed when it comes to energy. For a start, it could be argued that energy markets have unfairly favoured traditional energy because of the disproportionate political clout wielded by fossil fuel-based generators. Bradley’s Institute for Energy Research think tank, it should be noted, has reportedly received financial contributions from fossil fuel interests, including US coal giant Peabody Energy, and has been accused of being a mouthpiece for the hydrocarbons industries.

“If that is just left to its own devices and we don’t have proactive state leadership to ensure the market shifts in line with our international climate change agreements, we as a world will experience catastrophic climate change, and who’s going to be feeling the impact of that most? It’s going to be the poorest and most vulnerable communities,” says Newsom.

“Electricity trading is highly administered, and that administration is necessary to ensure instantaneous balance of supply and demand,” he says. “So there isn’t really a market, as such. We’re not talking about a free market, we never have been talking about a free market. Market process is where consumers make their own independent decisions to buy things. That isn’t what’s driven the huge reduction in [the cost of] renewable technologies. What’s delivered that has been the provision of a secure future market and competition between providers trying to deliver into that.”

Ultimately, any debate on a business-as-usual, technology-neutral approach to energy policy versus a clean energy transition partially supported by the state boils down to a far more fundamental question – how imminent is the threat of climate change? For the overwhelming majority of scientists and policymakers, the answer is clear – climate change is spinning out of control and urgent action is required at the highest levels to avoid devastating environmental consequences, some of which are already becoming clear.

Without the conviction that the 2°C warming goal must be met, it becomes much easier to criticise public expense on the renewables, smart technologies, storage systems and grid upgrades that will be necessary to meet the challenge.

Bradley, for one, describes the effects of climate change as ‘global lukewarming’, accusing international bodies such as the IPCC of over-stating the warming effect and even advocating the “distinct ecological advantages” of climate change at the lower end of the warming estimates.

“If you don’t believe that climate change is an issue that needs tackling, then of course, green energy subsidisation is bonkers, to the degree that it’s happened,” Skillings says. “The way I see it, there is an overwhelming scientific consensus that things are going in a very worrying direction, very quickly. If you look across the spectrum of science, this is one area where there is unusual consensus that action is needed. So if you agree with that, then the next question becomes how do we do this as cheaply as possible, and in a way that is deliverable.”